founder friendly standard

Should a startup founder agree to a non-compete?

Jennifer Rohleder's review of Gust Series Seed Term Sheet

Hell no. Are you kidding me?

Non-competes can advance the interests of investors to the detriment of entrepreneurs. That is why Founder Friendly Standard section 2.5 limits non-competes to the period of a founder’s work for the company, making it possible for a founder to earn a living in his/her industry after he/she leaves.

In 2019, I led a study where attorneys compared popular term sheets to Founder Friendly Standard. The below videos were produced during the study and originally posted on Quora. Other noteworthy outputs from the study include this infographic comparison and this attorney roundtable discussion.

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“Standard” term sheets are only 38% founder-friendly

Side-by-side comparison of "standard" term sheets to Founder Friendly Standard

Y Combinator Safe, 500 Startups KISS, and other “standard” term sheets cannot claim they are founder-friendly, reveals study by 6 startup attorneys.

Six attorneys compare popular investment agreements side-by-side to Founder Friendly Standard
Click each box in the interactive version for analysis.

Nearly every hour of my spare time since May 2019 has gone into this research study to determine if “standard” term sheets really are founder-friendly. It feels amazing to be finished! Here is what we found.

Six attorneys analyzed 298 pages of legalese from:

  1. Y Combinator Safes
  2. 500 Startups KISS notes
  3. NVCA Model Legal Docs
  4. Gust Series Seed term sheet
  5. Sam Altman ‘Founder-Friendly’ term sheet
  6. Y Combinator Series A term sheet

Compared to Founder Friendly Standard®, a framework for determining if a venture capital or angel investment deal is founder-friendly, the above “standard” term sheets and contract templates were on average:

  • A little more than a third (38%) founder-friendly as defined by being compatible with Founder Friendly Standard.
  • Just under a third (32%) founder-unfriendly as defined by being incompatible with Founder Friendly Standard.
  • Nearly a third (30%) silent on the issues in Founder Friendly Standard.
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Why startup founders should have super-voting equity

Super-voting equity for founders in Section 1.1 of Founder Friendly Standard

Founder Friendly Standard gives founders 24:1 super-voting shares of stock. The purpose is to keep founders in control of their startups so they can build for the long term.

Here are data that support giving startup founders super-voting shares and thus control of their companies:

  1. Google has 10:1 super-voting equity for its founders. Snapchat doesn’t give shareholders any voting rights. Investors buy stock in these companies every day. 
  2. The Credit Suisse Family 1000 research found that companies controlled by their founders build for the long-term, which translates to a competitive advantage over time.
  3. Principal-agent theory suggests that agents (investors) may be more short-term focused than principals (founders).
  4. Prospect theory suggests that diversified investors would engage in riskier behavior to seek outsized gains. Founders, whose net worth is not diversified, would often prefer the opposite.
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Are there standard investment contract templates for investors and founders to use when funding startups?

Screenshot of a standard startup investment agreement

Yes, but founders should not trust them. A team of attorneys reviewed six popular term sheets in the infographic below. The attorneys revealed many investor agreements are not founder-friendly. Your first step should be to retain a laywer who represents entrepreneurs.

Screenshot of a standard startup investment agreement
Figure 1. Investment agreement template called “Founder Friendly Standard”

Ask your attorney about a startup investment contract template called Founder Friendly Standard. Founder Friendly Standard has 17 sections that can lay common disputes to rest such as who gets to vote, who gets liquidation preferences, what is the scope of non-compete, etc.

Here are (3) three of the juiciest sections:

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17 tweets from Grays Sports Almanac for Venture Capital

#StartupGrind 2019 was a coming out party for many of the ideas behind my investment hypothesis, Grays Sports Almanac for Venture Capital. 

Here are the top 17 tweets that illustrate points made in the book:

🤑 #startupgrind – solution to #VentureCapital liquidity problem = service providers to take a portion of their fees in warrants and swap 50% with a fund. The service providers would be earning client fees as their #diversified warrants appreciate. From my book, link in profile.

  • Screenshot from Grays Sports Almanac for Venture Capital by Eisaiah Engel. Find the audiobook on Audible or iTunes.

Originally tweeted by EISAIAH ENGEL (pronounced Isaiah) (@eisaiah_e) on February 12, 2019.

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Manage 10 of the 20 top startup failure risks.

Founder Friendly Standard and customer-funding can help founders avoid “No market need, Running out of cash, Not the right team,” and 7 more reasons startups fail. 

Source: Top 20 reasons startups fail is from CB Insights. I added the check marks.

The above graph shows the top 20 reasons why startups fail from CB Insights. I marked up the graph with green checkboxes to show which risk factors customer-funding (also called bootstrapping) can help you manage. Orange checkboxes denote risk factors that Founder Friendly Standard can help manage. 

Risk Factor: No market need

If you’re bootstrapping, you’ll find out pretty quickly if there is no market need. Unlike your angel and VC-funded cohorts, you’ll be able to make fast pivots while they’re lining up their organizations’ change management strategies.

Risk Factor: Ran out of cash

If you are bootstrapping, you are financing innovation with organic cash flows. This is a key growth driver in the Credit Suisse Family 1000 research. If your company is controlled by its founders, you’re more likely to pace yourself, spending the money like it’s your own vs. your VC-funded competitors who are quick to spend (principal–agent theory).

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Update: Founder Friendly Standard v1.1

Pictures of Founder Friendly Standard Authors
Pictures of Founder Friendly Standard Authors
Founder Friendly Standard Authors: Dan Flanegan, Eisaiah Engel, Adam Bloom

Founder Friendly Standard v1.0 has been updated today. The new version of the standard is 1.1. Here is a description of the change:

  • Section 2.4 – clarifying language (in bold) has been added for companies outside of the United States. The section now reads: Due to potentially devastating tax consequences, the company tells individuals receiving sweat equity in the United States to consult with a tax professional about making an election under Section 83(b) of the Internal Revenue Code. Founders who live or pay taxes outside the United States are similarly advised to consult tax professionals about applicable local and national taxes.

If you’re curious about how the Founder Friendly Standard came to be, check out the story of our terrible startup experiences in “I’ll be the Sean Parker to your Mark Zuckerberg.”

Grays Sports Almanac for Venture Capital

Grays Sports Almanac for Venture Capital - A new standard for optionality to beat the odds

A new standard for optionality to beat the odds

Grays Sports Almanac for Venture Capital proposes a new risk management strategy for venture capital. In this book, I outline why a venture fund might beat the odds by purchasing 2,208 to 4,416 warrants on startups. Startups would operate under a governance framework called the Founder Friendly Standard, which gives entrepreneurs control of their companies. In exchange, the venture fund would have the option to exercise warrants for 15 years—purchasing discounted equity only in the startups that become successful.

Buy it on Amazon
Book cover: Grays Sports Almanac for Venture Capital - A new standard for optionality to beat the odds

Introduction

In 2017, Forbes published an article called, “Group of White Men in Patagonia Vests Confused for VC Fund, Raise $500 Million.” It took a while for me to realize the article was satire. A year later, researchers from Harvard, IESE, and Yale unintentionally corroborated the Forbes story with the finding that luck and past success are the winning factors for startup investors—not skill (Nanda et al., 2018). Luck and past success can cause venture capitalists to become overconfident and tinker with their portfolio companies. This can be a problem for entrepreneurs and for limited partners (often pension funds and family offices) who trust venture capitalists to invest wisely.

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I’ll be the Sean Parker to your Mark Zuckerberg

How the startup struggles of three entrepreneurs inspired Founder Friendly Standard

What follows is the story of the startup struggles that inspired Dan, Adam, and me to write Founder Friendly Standard in 2017 to help other entrepreneurs avoid our mistakes. The story is called, “I’ll be the Sean Parker to your Mark Zuckerberg.” It was originally written as a speech about entrepreneurship I delivered one time at Southern Methodist University (SMU) on March 2, 2018. 

Sean-Parker_Mark-Zuckerberg

When I was in my 20s, I met Gk Parish-Philp, a co-founder of DivX. I asked him how to get investors for my startup. He said, “You don’t want investors. They’ll take too much control.”

“That can’t happen to me,” I thought.

Years later, when I was getting forced out of a successful company that I started, I realized Gk was right.

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